How To Look At Canadian Apartment Properties Real Estate Investment Trust (TSE:CAR.UN)

Alexis Guardo
November 27, 2018

Canadian Apartment Properties Real Estate Investment Trust is a CA$6.7b
mid-cap,
real estate investment trust (REIT) based in Toronto, Canada.
REITs are basically a portfolio of income-producing real estate investments, which are owned and operated by management of that trust company. They have to meet certain requirements in order to become a REIT, meaning they should be analyzed a different way.
In this commentary, I’ll take you through some of the things I look at when assessing CAR.UN.

A common financial term REIT investors should know is Funds from Operations, or FFO for short, which is a REIT’s main source of income from its portfolio of property, such as rent. FFO is a cleaner and more representative figure of how much CAR.UN actually makes from its day-to-day operations, compared to net income, which can be affected by one-off activities or non-cash items such as depreciation.
For CAR.UN, its FFO of CA$359m makes up 91% of its gross profit,
which means the majority of its earnings are high-quality and recurring.

TSX:CAR.UN Historical Debt November 26th 18

CAR.UN’s financial stability can be gauged by seeing how much its FFO generated each year can cover its total amount of debt. The higher the coverage, the less risky CAR.UN is, broadly speaking, to have debt on its books. The metric I’ll be using, FFO-to-debt, also estimates the time it will take for the company to repay its debt with its FFO.
With a ratio of 8.9%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take CAR.UN
11.26 years to pay off using just operating income, which is a long time, and risk increases with time. But realistically, companies have many levers to pull in order to pay back their debt, beyond operating income alone.

I also look at CAR.UN’s interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it’s better to use FFO divided by net interest.
With an interest coverage ratio of 3.06x, it’s safe to say CAR.UN is generating an appropriate amount of cash from its borrowings.

I also use FFO to look at CAR.UN’s valuation relative to other REITs in Canada by using the price-to-FFO metric. This is conceptually the same as the price-to-earnings (PE) ratio, but as previously mentioned, FFO is more suitable.
CAR.UN’s price-to-FFO is
18.79x, compared to the long-term industry average of 16.5x, meaning that it is
slightly overvalued.

Next Steps:

In this article, I’ve taken a look at Funds from Operations using various metrics, but it is certainly not sufficient to derive an investment decision based on this value alone. Canadian Apartment Properties Real Estate Investment Trust can bring about diversification for your portfolio, but before you decide to invest, take a look at the other aspects you must consider before investing:

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

CAR.UN’s investment overview

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